AMD's Q4 earnings improve, but not enough

Chipmaker appears to be headed in the right direction with improvements in both revenue and gross margin during the fourth quarter, but that still wasn't enough to generate a profit, even excluding the effects of a hefty one-time charge.

While the raw numbers from AMD's latest earnings call are as gory as we've seen from the chipmaker this year, the bigger picture is more favorable.

AMD took steps toward--but fell just short of--profitability during its fourth quarter. On a net loss basis, the number is staggering: AMD reported a loss of $1.8 billion. However, the few Barcelona shipments that did go out during the fourth quarter helped AMD fall just short of profitability after you factor out a few one-time charges.

AMD Chairman and CEO Hector Ruiz
AMD

The net loss number reflects a charge AMD was forced to take after determining that it had some "impairment of goodwill." That's fancy accounting speak for "we overpaid for ATI Technologies by $1.6 billion." It actually could have been worse; after it bought ATI, AMD earmarked $3.2 billion to account for goodwill, which is essentially the amount of money a company spent on another company beyond what it was really worth.

In 2006, AMD paid $5.4 billion for ATI, meaning that when they accounted for the acquisition, AMD's accountants determined that ATI's hard assets were only really worth $2.2 billion. Companies can carry the difference on their books as an asset called goodwill that is intended to quantify the value of intangible assets--things like a brand name and happy employees. But goodwill has to be written off over time, and if a company determines at some point that the acquired brand name is actually worth far less than $3.2 billion, for example, they've got to acknowledge that with a write-off.

Luckily for AMD, however, you don't have to take that kind of hit every quarter. The health of AMD's ongoing processor and graphics businesses are much more important to its future and the future of executives such as CEO Hector Ruiz and president and chief operating officer Dirk Meyer. And on that basis, AMD made strides in the fourth quarter, reducing its net loss excluding the charge to $97 million.

On an operational basis, AMD lost only $9 million. You know you've had a bad year when financial analysts are congratulating you on only having lost $9 million before interest and taxes. Still, AMD said it shipped a record number of processors during the quarter, and the processor division itself posted an operating profit.

Barcelona, the bane of AMD's existence in 2007 but the key to its 2008, is getting out to customers, Meyer said. The revised version of the quad-core server chip that fixes the TLB bug is out of AMD's fabs, and the company is getting ready to release engineering samples to its customers over the next couple of weeks, he said. Barcelona will help AMD improve its average selling prices and revenue, although it probably won't make an impact on AMD's bottom line until the second quarter, when the majority of the shipments finally takes place.

AMD shipped nearly 400,000 Barcelona processors during the quarter. Processor-related revenue was up 11 percent compared with the third quarter, but down compared with last year's fourth quarter. Gross margin improved by 3 points compared with the third quarter, and by 8 points compared with last year's fourth quarter, but that's still not high enough for AMD to break even.

"We have got to return to profitability as soon as we can," Ruiz said, reiterating AMD's plans to be a profitable business in the second half of this year. A healthy Barcelona chip will certainly help that bottom line, as server processors are the most profitable segment in the division. AMD also has new notebook chips on tap for the first half of the year that could help boost the bottom line if they arrive on time and without incident.

The company's near-term outlook wasn't great, but nobody's feeling that great about the first half of the year right now. AMD expects first-quarter revenue to decline within normal seasonal patterns; the chip business always sees a decline in revenue going from the holiday-season fourth quarter to the cold and dreary first quarter.

Also, AMD still isn't ready to outline its manufacturing plans. The company has made vague references to an "asset light" strategy, which turned into an "asset smart" strategy as soon as rumors started flying that AMD might be ditching its expensive chip fabrication plants. Of course, the rumors have been fueled by near silence from AMD executives on the plans, which likely involve a greater reliance on chipmaking foundries to manage spikes and drop-offs in demand.

Hopefully for AMD, this was the bottom. Barcelona is a year later than expected, but it should stabilize the company at this point. Now, all AMD needs to do is pull off the ambitious Fusion project scheduled for 2009, and it might once again become a persistent thorn in Intel's side.

About the author

Tom Krazit writes about the ever-expanding world of Google, as the most prominent company on the Internet defends its search juggernaut while expanding into nearly anything it thinks possible. He has previously written about Apple, the traditional PC industry, and chip companies. E-mail Tom.
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